Nexen Jumps on Cnooc Takeover Optimism

By Rebecca Penty and Jeremy van Loon -
Dec 3, 2012

Nexen Inc. staged its biggest rally
since Cnooc Ltd. announced a $15.1 billion takeover of the oil
and gas producer in July, signaling rising confidence Canada
will approve the deal as the deadline for a decision approaches.

Nexen gained 1.8 percent to close at $24.79 in New York
today after rising 3.9 percent on Nov. 30, the biggest jump
since Chinese state-owned Cnooc announced its offer on July 23.
Prime Minister Stephen Harper’s government is slated to finish
its review of the takeover, the largest foreign purchase by a
Chinese company, on Dec. 10.

“Overwhelmingly, the asset management community in Canada
believes very strongly it’s going to get done because it’s hard
to see a reason why it wouldn’t,” said John Stephenson, who
oversees C$2.7 billion ($2.72 billion) at First Asset Investment
Management Inc. in Toronto, including Nexen shares. “It’s still
hugely in Canada’s interest.”

Canada is undertaking a “rigorous” review of Cnooc’s
$27.50-a-share bid for Nexen, Immigration Minister Jason Kenney
said in Ottawa. The government has pledged to attract investment
to fund natural resource projects and to diversify exports away
from the U.S., even as a recent poll shows a majority of
Canadians oppose Nexen’s takeover. Proposed projects would add
C$4 trillion to the economy in the coming decades, Natural
Resources Minister Joe Oliver said.

Arbitrage traders are probably driving Nexen’s stock price
volatility, Stephenson said. Nexen dropped five straight
sessions in New York before the rally on Nov. 30. The three
foreign takeovers Canada rejected in the last 25 years amount to
a track record that’s “looking dodgy,” he said. Hedge funds
now own 34 percent of Nexen, according to figures compiled by
Bloomberg.

Economic Repercussions

Cnooc needs Canada to sign off on the deal through its
foreign takeover law, which requires a “net benefit” for the
nation. Cnooc also needs U.S. approval to acquire Nexen’s Gulf
of Mexico assets and agreement by the European Union and China.

Canada rejected a C$5.2 billion bid for Progress Energy
Resources Corp. from Petroliam Nasional Bhd., Malaysia’s state-
owned oil company on Oct. 19, on the grounds it was not of net
benefit to Canada. Progress shares gained 1 percent in Toronto
today after rising 3.3 percent to C$20.18 on Nov. 30. Petronas
resubmitted its bid for Progress to address the government’s
concerns.

Canada faces economic repercussions “for years to come”
if it blocks takeovers of Nexen and Progress Energy, David Simon, founder and chief executive officer of Wall Street hedge
fund Twin Capital Management LLC, said by phone from New York.

“The Canadian dollar will get killed,” said Simon, who
owns shares in both Canadian companies. “Canada’s oil industry
will be set back. These are two companies in desperate need of
capital that nobody else really wants.” He called the offers
from Cnooc and Petronas “a huge favor” to Canadians.

Time Deadline

Finance Minister Jim Flaherty, speaking in Ottawa, said
there is no “time deadline” for a decision on the deal.
Beijing-based Cnooc and Nexen have both said in recent weeks the
deal is expected to close before the year’s end.

Patti Lewis, a Nexen spokeswoman, did not immediately
return a phone and e-mail message seeking comment on the
likelihood and timing of approval. Cnooc’s expectation the deal
will close by the end of the year “remains unchanged,” Peter
Hunt, a Cnooc spokesman in Calgary, said by e-mail.

Canada extended its review of Cnooc’s bid for a second time
on Nov. 2, setting the deadline to Dec. 10.

“It’s thought that we are approaching the decision
point,” said Timothy Parker, portfolio manager at T. Rowe Price
International Inc. in Baltimore, who holds Nexen shares. “As
you get closer to the deadline it re-polarizes the situation. If
you’re going to sell, you’re going to sell now. If you’re going
to buy, you’re going to buy now,” Parker said. He said public
statements from government ministers are seen as “tilting the
odds” in favor of the deal. “The body language has been
consistently more positive from official after official in
recent weeks and months.”

Capital Required

Development of Canada’s resources, including the world’s
third largest oil reserves in Alberta, requires foreign capital,
the province’s Energy Minister Ken Hughes told reporters at a
Calgary conference.

Harper has made it a “national priority” to sell more
resources to Asia and to boost growth in the world’s 11th-
largest economy by diversifying exports away from the slower-
growing U.S. market, which consumes three-quarters of Canada’s
shipments abroad.

Deal Implications

“If Canada is not comfortable with investment coming in
from state-owned energy companies, then we need to think about
where we’re going to get the capital to develop the resources in
this country,” Hughes said. “The implications of rejection of
these kinds of investments -- it could be worth hundreds of
billions of dollars of investment. This will set the tone for
any other investment. This is exceedingly important for
Canada.”

Canada rejected Melbourne-based BHP Billiton Ltd.’s $40
billion hostile takeover bid for Potash Corp. of Saskatchewan
Inc. in 2010, the second rejection in 25 years following its
blocking of Alliant Techsystems Inc.’s bid for MacDonald
Dettwiler & Associates Ltd.’s space business in 2008.

The Canadian government’s “ambiguity” on the Cnooc-Nexen
deal is keeping arbitrage traders playing the spread between
Cnooc’s offer and Nexen’s share price for profit, said Rob Bellinski, an equity analyst at Morningstar Inc. in Chicago.

Tremendous Uncertainty

“There’s tremendous uncertainty around this deal,”
Bellinski said. “There are no rules in place and the Canadian
government hasn’t said what they’re looking for.”

Harper pledged Nov. 28 to issue new guidelines on foreign
investments in Canada in “the near future.”

Even with the latest gain, the gap between the offer and
stock price is 11 percent, ranking 14th of 111 North American
deals tracked by Bloomberg. That indicates some investors are
concerned the deal won’t win approval. The gap in the Progress
bid is 8 percent, which ranks 18th among takeovers monitored.

Fifty-eight percent of Canadians believe the government
should block the Nexen takeover, an online survey of 1,000
people taken Oct. 10 to Oct. 11 by Angus Reid Public Opinion
showed. The New Democratic Party, Harper’s main opposition in
Parliament, has opposed the bid.

Cnooc has made several commitments to win the government’s
support for its bid, including listing its shares on the Toronto
Stock Exchange, making Calgary its head office for North and
Central American operations and maintaining Nexen’s employment
levels and capital spending.

The Alberta government has lobbied for additional pledges
from Cnooc, including that at least half of Nexen’s management
and board positions be held by Canadians and that the company’s
employment levels are maintained for at least five years,
according to a person familiar with discussions.